What we’re living through right now is a shootout between what really drives stock markets and what can often distract investors, albeit temporarily. Yep, it’s all about US earnings for the Yanks, especially when we know the American economic recovery is for real. And it seems, on nearly a daily basis, geopolitical or medical concerns compete for investor preoccupation but the former is way outpointing the latter.

On the earnings front, Caterpillar and 3M beat expectations and raised full-year outlooks. These two companies are seen as bellwether businesses, especially Caterpillar, as it’s leveraged to the world’s willingness to invest in infrastructure and construction.

But it didn’t end there, with Microsoft and Proctor & Gamble again letting the good earnings roll. Although Amazon was the one standout disappointment, all up US earnings are helping to boost investor confidence.

Meanwhile, US economic numbers reinforce the view that we can believe in the Yanks’ economic recovery. This is what showed up over the week:

• Existing home sales rose 2.4% in September to an annual rate of 5.17 million units – the strongest reading in a year.
• The US leading indicators index rose by 0.8% in September, pointing to solid economic growth for the rest of the year.
• US FHFA home prices rose 0.5% in August to be up 4.8% over the year.
• The markit “flash” manufacturing fell from 57.5 to 56.2 in October and, while the number is down, any result over 50 means the sector is expanding. This means expansion is solid if only down a tad, which can be statistically insignificant.

However, it wasn’t purely US news pushing up my confidence.

What I liked

• European shares up solidly on Tuesday, after reports said the European Central Bank is set to buy corporate bonds. A Reuters report said the ECB bond-buying plan could be approved by December and start early next year. The plan could help to free bank balance sheets for lending, particularly for the peripheral economies and work like a second-rate QE program. At least it would give Europe some overdue and needed economic stimulation.
• The “flash” HSBC Purchasing Managers Index for October was 50.4, up from 50.2 in September and a three-month high.
• BHP seeing a high of $34.38, after seeing a low of $31.91 on October 13.
• Charlie Aitken coming up with this: For private investors the best risk/reward/quality/diversity option remains BHP Billiton (BHP), which is effectively an ETF over iron ore, oil, copper and coal.
• Charlie liking Super Retail Group could be an omen for a huge Christmas, which is not only important for retailers but crucial for the economy, as we need to see a more optimistic consumer.
• The Sensis Business Index, which takes the pulse of SMEs. I’ve found that this index has given me valuable insights into where the economy is going. It saw confidence spike 16% between the June and September quarters!
• Ron Bewley’s take on what analysts are seeing for stocks. (Note the chart at the end of this read. It’s a ripper for optimists.)
• The Mt. Atkinson residential development launched this week, 23kms from Melbourne’s CBD. This is a huge vision and the team involved is set to create 72,000 jobs and add $8.3 billion to GDP! This country needs more projects like this.
• Australian rugby finding a new coach in Michael Cheika by week’s end, especially as the team left for their UK tour on Friday! Good luck to them.
• Citi analyst Craig Woolford’s calculation that Aussie households are $5.75 billion per annum better off (or $625 per household) because of the recent fall in the petrol price and the failure of the Government to get its tough budget through.

What I didn’t like

• A ‘fan’ asking me a question starting with the line: “I know you’re an eternal optimist”, which isn’t right. I will turn negative when I see the reason to be negative. I’m no use to you if I’m optimistic all the way into the next crash!
• The tragedy in Ottawa.
• The silliness of that ebola-affected doctor in New York, who they say has done everything right with his self-monitoring. I hope the officials are correct.

One more thing

In case you were wondering, we’ve just gone through our best week for stocks since February and we’ve been up eight out of the last nine sessions.

The next question I’ll be driven by next week is: have we made the bottom for the market for this year and are we rolling into an end of year Santa Claus rally? CMC Market’s Michael McCarthy says ‘yes’ and argues that it’s not just fundamental analysis but also the technical stuff is pointing to a happy ending for stock players as 2014 slides into the silly season.

Let’s hope he’s right but we’ll be testing his proposition in coming weeks.

Watch for the week

The S&P 500 finished at 1964. If it can crack 1966 it could be really good for stocks to head higher. Can’t wait for Tuesday next week when the Yanks complete Monday trade.

Top stocks – how they fared

The week in review (click on blue text to read more)

• I explained why I think we could be in for better times for stocks, but the US will continue to call the tune on what happens during October.
• My colleague Paul Rickard pointed to where you can find value in the hybrid securities market.
• Paul also said the Medibank Private IPO is no bonanza – but he’s still in!
• Sydney Airport, Flight Centre, Webjet, Corporate Travel Management and Cover-More are five tourism companies James Dunn thinks are well positioned.
• We found out from Roger Montgomery why Challenger is a high quality business.
• This week, the brokers upgraded Coca Cola, Downer and Fortescue Metals, and downgraded Ausdrill. The brokers also upgraded James Hardie, Lend Lease and Macquarie, and downgraded Dick Smith.
• Barrie Dunstan says don’t “sweat it” over the RBA’s worries on property, and that any fallout won’t mimic the US.
• Penny Pryor walked us down memory lane to see which of our calls on a falling Aussie dollar paid off – Amcor and CSL fit the bill.
• And Tony Negline explained the income test changes which could affect your eligibility for the Commonwealth Seniors Health Card.

What moved the market

• Apple’s strong earnings results – the company’s quarterly revenue was $42.1 billion and quarterly net profit was $8.5 billion.
• China’s economic growth rose 7.3% from a year earlier in the three months to September – beating analysts’ predictions – but this is also the slowest expansion in five years. China’s “flash” manufacturing gauge for October also clocked in at a 3-month high of 50.4.
• Australia’s main measure of inflation – the Consumer Price Index (CPI) – rose by 0.5% in the September quarter, and the annual rate of inflation rose 2.3%, compared to 3.0% last quarter.
• The Markit “flash” eurozone manufacturing index rose from 50.3 in September to 50.7 in October. And Spain’s economy grew 0.5% in the third quarter.

The week ahead

Australia

Monday October 27 – Speech by Reserve Bank official
Thursday October 30 – New home sales (September)
Thursday October 30 – Export & import prices (September Qtr.)
Thursday October 30 – National Accounts 2013/14
Friday October 31 – Producer prices (September quarter)
Friday October 31 – Private sector credit (September)

Overseas

Monday October 27 -US Pending home sales (September)
Tuesday October 28 – US Consumer confidence (October)
Tuesday October 28 – US Durable goods orders (September)
Tuesday October 28 – US Case Shiller home prices (August)
Wednesday October 29 – US Federal Reserve meeting
Thursday October 30 – US Economic growth (Sept quarter)
Friday October 31 – US Personal income (September)
Friday October 31 – US Consumer sentiment (October)

At home the week kicks off with a speech by the RBA’s Head of Financial Stability, Luci Ellis, at the Australian Housing and Urban Research Institute Seminar. Things pick up later in the week with import and export prices for the September quarter along with detailed data from the ABS’ 2013/14 National Accounts, released on Thursday. We also find out about business inflation with Producer Prices Data, and lending with Private Sector Credit data, on Friday.

Overseas, the highlight will be the Federal Reserve Open Market Committee (FOMC) meeting on Tuesday and Wednesday, where they will discuss current policy settings. The big question will be – will they or won’t they announce the end of Quantitative Easing (QE)?  We will find out at 2.00pm US ET on Wednesday – 5.00am our time (ESST) on Thursday.

Calls of the week (click on blue text to read more)

• PUP senator Jacqui Lambie did herself no favours this week after asking a defence official whether they had information to suggest Australia’s enemies could attack the nation and military with the Ebola virus!
• Our very own contrarian call-maker, Charlie Aitken, says the iron ore price may have bottomed for the year, and tipped BHP and FMG for good exposure.
• And Apple co-founder Steve “Woz” Wozniack agreed to his first academic appointment ever as an adjunct professor in the University of Technology’s ‘Magic Lab’ – a laboratory dedicated to innovation and enterprise research.

Food for thought

“The punters know that the horse named morality rarely gets past the post, whereas the nag named self-interest always runs a good race.”

– Former Prime Minister of Australia – Gough Whitlam (1916-2014).

Last week’s TV roundup

• The Medibank Private float has been a hot topic – but is it a good deal for mum and dad investors? Switzer Super Report director Paul Rickard has run his eye over the recently released prospectus to tell us what he thinks.
• Are our banks vulnerable because of their home loan lending habits? AFR journo Christopher Joye and Paul Rickard go head to head to discuss the security of the ‘big four’.
• October is famous for rocking market waters, but it can also create the bottom from which we can only go higher! Switzer Super Report expert Ron Bewley tells us if our market is moving on up.
• This week, we changed things up a little – I sat in the hot seat while my colleague Paul Rickard asked the questions on where this economy is headed. Is volatility the new norm? Find out here.

Stocks Shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short – which could suggest investors are expecting the price to come down. The table also shows how this has changed compared to the week before.  We will find out at 2.00pm US ET on Wednesday – 5.00am our time (EST) on Thursday.

Source: ASIC

My Favourite charts

Analysts getting more bullish

Source: Woodhall Investment Research

On my show this week, Ron Bewley from Woodhall Investment Research revealed analysts are upgrading their capital gains forecasts for the ASX200 – and it looks like it’s reliably trending up! In June, analysts were only expecting average sharemarket gains of 6% in the next 12 months – now they are up to almost 10%!

State of the States – NSW edges ahead of WA

After analysing eight key economic indicators for Australia’s states and territories, CommSec’s quarterly State of the States report declared a new winner for the first time since July 2011, with NSW moving from third to first! One of the indicators, dwelling starts, is featured in the above chart.

Top five clicked on stories:

• Paul Rickard – Medibank is no bonanza – though I will be investing
• Charlie Aitken – Contrarian calls – BHP and IAG
• Tony Negline – How to keep you Commonwealth Seniors Health Card
• Staff Reporter – Buy, Sell, Hold – what the brokers say
• Penny Pryor – Short n’ Sweet – Amcor and CSL

Recent Switzer Super Reports:

• Thursday, 23 October, 2014: Is greed good?
• Monday, 20 October, 2014: The big bad wolf

Have a great weekend,

Peter Switzer
Founder and publisher of the Switzer Super Report

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.